Saturday, August 24, 2013

Do Savers Need to be Saved?

The Bank of England is following the Federal Reserve and the ECB in adopting forward guidance. Bank of England Governor Mark Carney announced that the Bank will not raise interest rates until the jobless rate--currently 7.8%-- falls to 7% or below. According to the Monetary Policy Committee (MPC), this state-contingent forward guidance implies that interest rates are likely to remain at the current 0.5% rate for about three years.

The backlash against this announcement of continued low rates is particularly strong and vocal in the UK, where an organization called Save our Savers is campaigning against "artificially low interest rates." The organization writes, "Although the financial crisis was caused by debt, the Bank’s policy continues to favour borrowing at the expense of saving." This sentiment appears, sometimes in more subtle forms, in the US too. Perhaps the most notable counterpoint to Save our Savers is Frances Coppola, who has this to say about low interest rates and savers:

"The desire of savers to be compensated for loss of purchasing power is understandable but wrong...Savers have no right whatsoever to expect to receive a higher rate of return than the ability of the economy to generate that return. If the economy is growing at 0.6%, the risk-free rate of return cannot be any higher than that. If savers want higher returns they have to put their money at risk.

At the moment savers have unreasonable expectations. They expect to have returns on their savings far above the current level of economic growth, and they also expect to have their savings protected from loss. But the only way savers can have risk-free returns above the growth rate of the economy is by others - most likely government - taking on debt. It's rent-seeking, frankly... In calling for higher interest rates, savers are effectively demanding that there should be no recovery. And in killing off such unreasonable expectations, Carney is doing us all a favour."

Note that the result that Coppola alludes to about the risk-free interest rate equaling the growth rate applies either to nominal interest rates and nominal growth rates, or to real interest rates and real growth rates. The UK actually has a 0.6% real growth rate, and 0.5% nominal interest rate. The nominal growth rate is over 3%. Also note that this is an equilibrium result--it holds when the economy is in "steady state," i.e. not always and not now. The UK nominal interest rate is several percentage points lower than the nominal growth rate. This has savers up in arms, and that's kind of the point. In theory, some of the savers who dislike earning the ultra-low risk-free rate could shift some of their consumption from the future to the present. That would raise current consumption relative to future consumption, reducing the growth rate of consumption, bringing the economy nearer to equilibrium. That is part of the goal of low interest rate policy. But it depends on how willing people are to substitute consumption "intertemporally," and how much utility they lose by doing so. To explain:

Interest rates theoretically have two opposing effects on savings decisions. On one hand, a higher real interest rate makes future consumption cheaper relative to current consumption, leading people to save more-- the substitution effect. On the other hand, a higher real interest rate increases the return on saving, giving some consumers more lifetime income--the income effect. The combination of the income and substitution effects means that the effect of higher real interest rates on consumption is theoretically ambiguous (see this survey or Chapter 7 of David Romer's Macroeconomics). An important parameter in models of consumption is the intertemporal elasticity of substitution, which tells us which effect dominates.

Savers who have low intertemporal elasticity of substitution are not very willing or able to shift their consumption forward in time to benefit from the fact that current consumption has been made cheaper relative to future consumption. Thus they have special reason to hate low interest rates because they amount to lower income. The most commonly cited example of this type of saver is a person who is retired or nearly retired:

"Obviously, for retirees who are living in part on investment income, low
rates have an immediate impact on their standard of living. With few
prospects to add to whatever they've managed to set aside in their
retirement nest eggs, retirees are largely at the mercy of banks and
other financial providers that determine how much interest they're
willing to pay their customers on their investment balances."

Hearing about these retirees is particularly compelling and makes it seem like low interest rates are violating an implicit social contract. Coppola says that "savers have unreasonable expectations." Is it unreasonable for for people who have worked and saved for years to expect a decent standard of living in retirement? Well no, it is not unreasonable, but higher interest rates are not the way to meet that expectation. Decent standards of living for retirees should be part of the social contract, but should be promoted through programs that target retirement security and/or consumer protection directly, and not through interest rate policy. (Just as financial stability should be promoted directly through regulatory policy, not through interest rate policy.)

Plus, not all savers are in the same boat as these retirees. For some people, the substitution effect dominates. Higher interest rates would encourage the more intertemporally elastic folks to spend less today, which would have majorly bad implications. Being unemployed hurts your income even more than getting a low return on your savings does.

A question on the the European Commission Consumer Survey asks consumers whether this is a good time to save, and a "good time to save" index is constructed by computing a balance statistic from the positive and negative responses. Here's a graph of the UK discount rate (downloaded from FRED) compared to the UK "good time to save" index. The correlation coefficient is 0.70.

The general tendency is that when interest rates are higher, people think it's a good time to save. But we don't know exactly what people mean when they say it is a good time to save; people can think it's a good time to save for multiple reasons. Most straightforward, high interest rates mean a higher return to saving. You might say it's a good time to save if you have a lot more income than you want to spend-- in good times, save some of the excess. In this case you would think it was both a good time to save and a good time to spend. But you might say it's a good time to save if you are trying to deleverage, or if your net worth has fallen and you are trying to build wealth back up to some target level, or if you fear losing a job soon. In these cases you would think it was a good time to save and a bad time to spend.

To get a clearer picture, it is useful to plot the "good time to save" index along with the "good time to spend" index, also from the EC Consumer Survey. Before 2008, the two indices had a mildly negative correlation coefficient of -0.34. Very roughly speaking, in bad times people favored saving and in good times they favored spending. But now? After 2008, the correlation coefficient is 0.40. Now it's so bad that both indices are low. It's a bad time to be a saver, and it's also a bad time to be a spender. People don't have extra money to save or to spend, and until the labor market improves, they won't. Raising the interest rates cannot possibly be helpful in this situation.

77 comments:

Why is business investment left out of this arguement? It would seem if it's a bad time to save then there is less money for business to borrow for productivity improvements, expansion, or hireing? Theoretically it would seem if rates are low enough so there is zero savings there would be zero money for investment, and business expansion could only come extremely slowly from profits accumulated by the spending occurring instead of savings.Did I miss something?

The Fed controls the interest rate for money that sits on its ass and doesn't do anything. If this interest rate is high, then letting your money sit on its ass becomes attractive. If this interest rate is low, then you have to actually look for investment opportunities to make any money. So cutting this interest rate generally increases business investment, and raising lowers business investment.

Money put into banks is not 'lent' out, and even if it were,there are currently huge corporate surpluses and savings to be used. I think it's safe to conclude that we are not looking at a shortage of funds at the moment.

Sorry if it confuses you Rothosen, but I disagree with the two other responses. First, the argument above does effectively allude to business investment when it mentions that in theory the interest rate should equal the economic growth rate. This is because the financial interest rate is in competition with the return on real investment, including investment in business. Second, it is a misconception that money ever "sits on its ass and doesn't do anything". If you put money in the bank, the bank must do something with it - typically lend it - to earn a return on it to pay you interest. What confuses people is that money circulates, so, in steady state, bank money is not destroyed when it is "spent" by the bank - typically on a loan asset - but comes back to another - even potentially the same - bank. The same as with currency; when you spend it, you transfer it to someone else and it is not destroyed.

In the comments to her original article, Frances Coppola says "The NOMINAL interest rate - the amount that savers actually receive "risk-free" - should be set by REAL GDP, so there is no compensation for inflation".

Carola should be saying that. I also read Frances Coppola's post, and considered it naïve.

Actually, even that "result", as Carola puts it (I never like the way that economists ape mathematicians with their terms), is quite stylised. Among other things, the growth rate should really be per capita.

I could have gone for the jugular and written a technical post explaining why savers should be thankful that they get the rates they do. But I chose to write my post for a more general audience. I stand by what I said, though. There is no justification for higher rates while the economy is stagnating.

Nor is there any justification for compensating savers for inflation, except for those who have invested in indexed savings products. Savers received returns well above inflation prior to the financial crisis. I don't recall anyone suggesting that their returns should be discounted by the inflation rates at that time. But now savers are receiving returns below inflation, they want their returns discounted. In effect, they want a retrospective interest rate floor embedded in their savings rate. I'm afraid I consider that completely unreasonable.

And while we are on the subject of inflation....where exactly is the inflation that would justify higher rates? CPI is currently 2.8%, which is within the 1% "flex" that the Chancellor allows around the 2% target rate. And the GDP deflator is actually negative for Q2 2013, which is deflation - see this from Britmouse:

http://uneconomical.wordpress.com/2013/08/23/uk-2013-q2-nominal-gdp/

There is higher inflation in SOME SECTORS, notably essential foodstuffs, energy and transport. These are the prices that particularly affect people on fixed incomes, so it is not surprising that they regard real inflation as higher than Government figures suggest. Energy and transport are subject to Government regulation because the suppliers are near-monopoly privatised utilities. If Save Our Savers want to shout about something, they should shout about the evident failure of the Government regulators to regulate those prices effectively.

There's nothing strange about money market rates being lower than GDP growth. Cash is generally regarded as a low-risk, low-return investment, at least in developed countries. Other investments offer higher returns, so on average, investments return more than GDP growth, even though cash doesn't.

There is a factor behind the "save our savers" campaign specific ( I believe) to the UK. If you have funds in a defined contribution pension, you are pretty much legally compelled to buy an annuity at about 65 though some can delay to 75(?).

Annuity rates are currently low. That is one reason some retirees here feel aggrieved. For many pension funds are their largest financial asset, and they face being locked into low rates for life. (There is a counter argument that the assets in their funds have been boosted by QE - but conventional wisdom is to shift to cash/safe things as you approach retirement.) nothing to do with macro, but significant for some.

Thanks for the additional context.According to their website, Save Our Savers campaigns against:-Devaluation of savings through inflation-Artificially low interest rates-Unfair legislation and taxation-Exploitative financial practices.My article is responding to their campaign against "artificially low interest rates." I do think that removing unfair legislation and exploitation are good things.

Except legislation designed to protect borrowers from predatory lending could be considered unfair and exploitative by savers. After all, shouldn't savers have the right to pursue the highest possible return on investment?

That's true, but Save Our Savers mainly seem to be campaigning against low interest rates on bank deposit accounts, not poor returns on pension funds. I suspect this is because, as you point out, assets have actually done rather well, so it's hard to make the argument that pension fund investors have generally lost out. Companies with defined benefit schemes have lost out though - many have suffered serious pension shortfalls. The need to top up defined benefit pension funds may have depressed corporate investment.

I think Save our Savers are quite right to complain about artificially low UK deposit rates, whether they are pensioners or not. The "promise" was that the BoE would set interest rates to hold the rate of depreciation of sterling against consumption items at 2%, or perhaps a little more given a 1% margin above this before the BoE is supposed to explain what it will do to get inflation back down to 2%. This they have patently failed to do. Now, the UK state can argue that this does not represent a binding promise, but that is not how they wanted the gilts market to see it when the inflation target was introduced, and I doubt that they will be admitting that it is not a promise going forward either.

Interestingly, the US situation is different. In my opinion, the QE done by the Fed does pose an inflation threat if the Fed prove unwilling to make sacrifices to unwind it, but so far, they are managing to stay reasonably close to their (less formal) inflation target, so US savers have less to complain about.

Noah may be a better teacher than blogger - his students are really good.

As a teacher myself, the retirees' complaint about interest rates sounds a lot like the student's complaint after a project/test: "You told me to do X, I did X, why don't I have an A?". Or in the retirees case its that they were told by society they should save, and yet now are struggling. This is essentially an argument that the world should be fair and of course it's not. My students won't be working in factories doing exactly what they are told - they need to be creative, self-learning and go beyond what Professor says. The best thing I can do for them is say "Do X, that will get you a C, and put you in position to learn what you need for a better grade"; in the same way saving is just the beginning - necessary before retirement, but not sufficient.

I think you're right on the button, Squeeky. I had to start working when I was 14. Fortunately there was a government program in my area where the Feds covered 1/2 the cost of hiring a poor person at minimum wage. It was the early nineties. A couple years later, the State under whose care I was decided my minimum wage job made my income too high for them to cover my medical, clothing, or school-related expenses any longer. No biggie--I was in good health and had a job. My grades suffered, but hey, what can you do?

Point is this--stuff happens people don't like. You bust butt to get through a door only to find it leads to the garbage dump. We pursue opportunities and often find them gone by the time they get there. Get over it. You saved money, isn't that nice? If you want a higher return, you need to go find one.

There's no reason a person just chilling in retirement or semi-retirement should be entitled to safe and easy returns. Take your savings and start a business or invest in an existing one. Buy distressed assets, improve them and resell. Hire a couple sociopaths who like to break arms and become a loan shark. There's a gazillion ways to get a better rate of return. They all involve spending, working, hiring, improving the real economy. Money markets, stocks, bank accounts? As far as I can tell they're no different than going to the casino and about as socially beneficial.

This is essentially an argument that the world should be fair and of course it's not.

To be fair to us savers, some of us believe that: banks should be required to have adequate capital and publish fair financial statements; bankers should be sent to prison for fraud when it occurs rather than being given government funded bonuses; government should not be complicit in large organized frauds like the LIBOR rate setting conspiracy; when bankers screw up and make bad loans the consequence should fall on the bank's shareholders and bond holders, not the general public, central banks should not build policies which can only work if they trick savers into making mistakes; saving the wealth of the top 1% should not be the primary goal of governments or central banks.

Do I expect the world to be fair: no. But I think I have a right to expect that government and regulators do not conspire with billionaires against me.

Absalon - I think you are completely right. In fact I'd go further. You should expect, and demand (ie vote) that your government do everything it can to make the world as fair as possible. It still won't be fair, but the government should try. Without getting into the details, I certainly agree with the spirit of your complaints (some harder to fix than others, but a better job could have been done).

If I were a conspiracy theorist I would be looking at the global financial industry tweaking the system so that: "savers" have nowhere to go but the stock or commodities markets to get interest (rent) on their saved wages. Of course there isn't any way for the global financial industry to do that -- or can they?

There is a lot of "money illusion" around the rates that savers receive, which is why I also discussed inflation. The Bank of England sets real interest rates according to real GDP, as Carola points out - the two are about the same. Savers argue that they should have higher nominal rates to protect their real returns from inflation. I don't see any justification for this.

Those who are living on the income from their savings do suffer a reduction in their spending power similar to that experienced by working people suffering reductions in real wages. But they are actually a minority of savers. The rest capitalise the income, increasing their savings. And most savers are also borrowers, who are doing well out of low interest rates on mortgages.

For the US, as Brad Delong points out, from 1985-1995 the gap between the interest rate on 10-year Treasuries and the nominal GDP growth rate averaged 3%/year. But from 1995 onward, nominal GDP growth has averaged almost exactly the nominal interest rate on 10-year Treasuries.http://delong.typepad.com/sdj/2013/01/interest-rates-and-nominal-gdp-growth-rates-since-1995.html

In more normal times it may well do. But that doesn't mean it always should. There is no requirement for monetary authorities to maintain interest rates at or above inflation, and no contractual commitment on the part of Government to protect savers from inflation unless they invest in inflation-protected products such as TIPS. If the monetary authorities consider that maintaining interest rates at around the level of real GDP growth is appropriate, they have the right to do exactly that. And that seems to be what the UK monetary authorities have been doing for the last few years.

What a load of rubbish Frances! The BoE does not openly set any interest rate according to any measure of GDP. It is supposed to be an inflation targeting central bank. The fact that it appears to be subverting its mandate is what people like Save our Savers are complaining about. And there is no need for any "justification" for this; it is just market arbitrage. If the UK tries to rig its financial interest rates unreasonably below the return on real investment opportunities, it will just mess up the British economy - eg lenders will stop lending in sterling. Pardon me, but your picture suggests that (like me) you are old enough to remember the 1970s. Didn't you learn anything?

I suggest those in the situation you describe "And most savers are also borrowers, who are doing well out of low interest rates on mortgages." should have a look at other ways of doing this. I tend to save or offset mortgage depending which has the best rates (and at present, mortgage rates are higher than savings rates).

It's also not quite that simple, as low interest rate mortgages have effectively increased house prices by stimulating demand. So spending more on mortgage initially offsets mortgage rates, rather than mortgage rates offsetting savings rates.

Standard advice (at least in the US) is to hold a balanced, diversified portfolio. That means some sensible mix of stocks and bonds. Low interest rates seem good for stocks. Low interest rates increase the value of bonds, even if they decrease the income (although this effect decreases with time). Low interest rates should help with economic growth, which should (in a rational world) decrease political pressure to decrease government payments to retirees (e.g., Social Security).

Also, just what is meant by "artificially low interest rates"? Central banks have been influencing interest rates for a long time.

On BBC Radio 4 today, Simon Rose of Save Our Savers clarified what he meant by "artificially low interest rates". He cited the rates paid by peer-to-peer lenders (typically around 5%) as a good example of market interest rate setting, suggested that lower rates on other savings products were artificially depressed rather than set by the market, and questioned why we need central bank rate-setting at all.

There is of course nothing to prevent savers lending at risk through peer-to-peer lenders. Indeed the fact that savers' representatives apparently thinks this is a good idea shows that the low interest rate policy is working. Peer-to-peer lending involves taking risks with savings for a higher return. That's exactly what we want savers do do.

Peer-to-peer lenders are online platforms that act as matchmakers between lenders and borrowers. They are unregulated and have no deposit insurance or central bank support. In short, they are the latest form of shadow banking. That is, of course, why they offer much higher interest rates. Savers who place their money with peer-to-peer lenders may get higher rates, but their money is at risk.

Rose recommended peer-to-peer lending on breakfast TV the other day for savers looking for higher rates: he did say that these lenders are unregulated but failed to mention the lack of deposit insurance and central bank support. I worry that he is misleading savers into putting their money at risk.

Rose's argument that peer-to-peer lending rates should be the "benchmark" rate appears to rest entirely on the idea that rates should be set by the market. And the fact that those rates are similar to the long-run average interest rate in the UK.

It is hard to determine the rate of most of my peer to peer lending, especially since it is usually in the form of credit at either farm stores or restaurants. (Hey, invest in what you know.) It's usually a ten or twenty percent discount rate on credit I'll use in six months, so the effective rate can appear pretty high. Of course, the loan is paid back in kind at retail, so I'm assuming the borrowers are paying well below that rate.

As best I can tell, our financial sector is almost completely divorced from our economy, save for its parasitic rent seeking. There is a huge savings glut and no investment opportunities, since incomes have been stagnant for decades. Kickstarter and its ilk are doing the job banks and investment houses used to do, before they became government clients. Still, despite the financial sector, capitalism will out.

In effect Rose is saying that the interest rates on risk-free savings (insured deposits and government bonds) should be at the same level as unsecured and uninsured loans to risky borrowers. Because they are lower, he thinks they are "artificially low". He doesn't seem to understand the relationship of risk and return.

I would regard 5% return on an unsecured and uninsured loan to a high-risk borrower via an unregulated intermediary as pretty low, personally. If that's all P2P lenders are offering, they are ripping off their lenders.

I don't think the idea of artificial interest rates is that difficult. It goes back at least to Wicksell. The central bank uses its control of the money supply to try to set a short term interest rate. If that financial rate is far off the rate determined by the interaction of real investment opportunities and preferences, the under or over supply of money required to fix the financial rate will be producing deflation or inflation.

I also heard that Radio 4 programme, and just about smashed the radio. Rose understated his own case. Peer to peer rates are also artificially low, because they are not free from the distortion by the BoE. It is just that, as Frances says, the p2p market can be expected to clear at a higher rate because of the additional risk involved.

Carola nice post. You and Aziz, another one of the Just As Good As Noahpinion :) guest bloggers, make similar points http://azizonomics.com/2013/08/17/why-savers-should-put-up-or-shut-up/ though I'd side with you stylistically. If only savers would team up with the un-employed and push for even more pro-growth policies, win-win.

My only critique of your post is I am not sure the inter-temporal elasticity of substitution is doing so much good here. I suspect (and have some survey evidence to back it up) that on average most people's general consumption path is not that sensitive to interest rates. Some types of purchases like cars or homes (or investment for firms) surely are quite sensitive to financing terms, including rates. At least through a recession-recovery, some of the other reasons you allude to for saving, like precautionary saving (freaked out about future shocks), buffer stock saving (rebuilding a nest egg), and adjusting to less expected income growth (spending less out of current income) may loom quite large. And in those survey responses.

One last thing on the survey responses. Households often think of taking on debt as spending and not as dissaving, so these responses might be linked in an unexpected way. It also might be helpful to plot the survey responses against the personal saving rate or the debt-to-income ratio as a check.

Again, very interesting, way to finish strong on growth. THIS: "People don't have extra money to save or to spend, and until the labor market improves, they won't."

You can tell me later how much Miles paid you to put the "published" question in. We have a prelim working paper (Kimball, Sahm, and Shapiro) just about our survey / estimation technique: http://www-personal.umich.edu/~mkimball/keio/5.%20papers/kss-eis%20copy.pdf. But that's just one bit in my reading of lots of results and macro relationships. I think for your purposes it's important to stress that we know relatively little about interest rate sensitivity of households since there is little random variation in interest rates. So the estimates in the literature range from close to zero to very high and it often comes down the type of rate variation. One other thing that when thinking about aggregate spending each household does not get the same weight, so the average across households may not capture the aggregate well. Still a good a place to start.

Not really. The passage from Frances that you originally quote suggests that the risk free rate is closely tied to the rate of growth in the economy through market forces. The discussion between Frances and Anonymous suggests that the risk free rate is closely tied to the rate of growth through policy choices by the Central bank.

Neither makes sense to me since both would mean that in a steady state, prosperous, but not growing, economy the risk free rate would be zero.

@Absalon, I think that the idea that in equilibrium the interest rate should equal the growth rate derives from dynamic optimisation, as in "Ramsey's golden rule". If that is consistent with the central bank's inflation target, then the central bank will end up with that rate anyway. And I believe that Warren Mosler argues that the government should create money to finance itself to the point that the interest rate is zero. I suspect that he is wrong, because it seems to me that MMT would essentially recreate the existing economy from from different principles, but the MMT ideas are not developed sufficiently rigorously to work that out.

Is it unreasonable for for people who have worked and saved for years to expect a decent standard of living in retirement? Well no, it is not unreasonable, but higher interest rates are not the way to meet that expectation. Decent standards of living for retirees should be part of the social contract, but should be promoted through programs that target retirement security and/or consumer protection directly, and not through interest rate policy.

Although I agree, we have to recognize that right now we don't have a very good system of that kind, and no major improvement seems to be on the horizon. So extremely low interest rates are possibly producing a negative wealth effect among that class of savers.

The way I would put it is that it is not unreasonable for people to expect a decent standard of living in retirement, AND it is not unreasonable for savers in nominal floating rate accounts to expect to receive a fair return on their assets, but the two issues are not quite the same. However, there is a relationship between them because many relatively modest savers using unsophisticated savings products like bank accounts to save for their retirement. My eighty something year old neighbour, who owned a pet shop before her retirement, is one of them, and she is being cheated by the BoE. Unfortunately for her, she does not blog!

As with so many other areas, we seem to have some complex phenomena here in which the policy techniques cut in several conflicting areas at once. It seems to me that we would like high volume savers with large savings surpluses - such as corporations that are now sitting on large quantities of liquid assets - to shift from low-risk vehicles to more risky primary and secondary investment. On the other hand, it would be good to get more interest income to low volume savers, preferably in the form of direct government provisions of money rather than as meres shifts from private sector debtors to creditors.

What if central banks offered direct, low-risk term savings vehicles to the public, but capped the quantity that could be saved per depositor. Wouldn't this be, in effect, a form of helicopter drop?

Dan, I'm in favour of the Government offering low-risk savings vehicle to the public. I'd rather it was the Treasury, not the central bank, though. Let's at least attempt to maintain the impression of separation of monetary and fiscal policy.

Singapore has this exactly. It's called Central Providence Fund (CPF). It offers guaranteed 4-5% return. The returns are backed by a combination of government securities (rates set by market), Government Investment Corporation (a sort of low-risk sovereign wealth fund), and Temasek Holdings (a private-equity sovereign wealth fund). The net is that private savings are funneled into a mix of safe and risky diversified investments with varied payoffs dates - each saver gets roughly the long term average.

There are problems with the system (it's a bit of a one-size-fits-all, and GIC holdings and total assets are explicitly opaque), but overall it's roughly what is being suggested here.

Savers also appear unaware of the risk of having savings in the UK/Any banking sector. With all finances maxed out and in the event of collapse of banks a likely deflation they may well get haircuts.

People with massive cash saving should ironically pay for a safe deposit box (not in a bank) and insurance and put cash in it? After all only fools, Gold bugs and those subsidised by pension credits of ordinary/unsophisticated/Limited Access investors have any reason to invest at present. Name one good investment? Housing = Bubble:Shares = Bubble: Bonds = Bubble: Unless you can move before the market which requires considerable skill and given banks most likely broken still then having eliminated the impossible what are left with is cash in hand = better investment?

I suspect economists, the joy in this is quite bizarre, like to keep knocking savers as they have no answer to the Zombie economy now mass QE has had little/no effect after I am told alleviating a liquidity crisis initially.

Exactly. Liquidity traps, the fact that interest rates are not able to go under 0% even when the free market requires it, is a huge subsidy to cash savers. On top of that, if it would have been possible for central banks to set a -3% or -4% rate for a year in 2008-2009 in line with free market returns, it would probably have solved the economic crisis swiftly and painlessly and the rates would now have naturally recuperated to a much higher level.

Instead the high 0% or more interest rate was a huge government subsidy to cash savers and established businesses that don't depend on loans and an unfair burden on small entrepreneurs and innovators that need new equipment to jump start their businesses and create new wealth and jobs. It distorted the market and paradoxically, the artificially higher 0% rates have kept rates lower in the long run.

You need the temporary very low or even negative rates to give the incentives for new business growth which then leads to higher positive rates backed by real private sector economic activity.

I see the point, but I struggle to believe that there could naturally be so few investment opportunities that the market-clearing real interest rate is below zero. I suspect that what is really going on here is that the authorities want to avoid the mark-down, and possibly liquidation, of existing investments (ie zombies).

"Decent standards of living for retirees should be part of the social contract, but should be promoted through programs that target retirement security and/or consumer protection directly, and not through interest rate policy. (Just as financial stability should be promoted directly through regulatory policy, not through interest rate policy.)"

Directness can create so much efficiency, and indirectness can create so much inefficiency. Medical advancement is also a good example. If you shovel an extra trillion in profits to medical companies to get $50 billion more in research, that's a lot less efficient than just spending $1 trillion more directly on basic medical research and prizes. You get 20 times the money spent on research.

Next, I'll say, I'm a big saver, and am fortunate that I've accumulated a relatively large amount of wealth, but I'd like rates cut and low. Why? Because like many other savers, I save nothing in long-term fixed rate assets, and little in short term fixed rate assets. My savings right now are in the stock market and real estate.

So, it really depends on what you save your money in. Not all savers want high interest rates.

I guess that, unless you are about to retire, you should really want interest rates that do not distort the economy. The 1970s were not good for stock market valuations either. But I suspect you raise an important - conscious or unconscious - motive for many of the established American (the UK ones are probably more interested in house prices) middle-aged academics, politicians, media commentators and financial professions who are advocating low interest rates.

I'm neither established nor middle-aged so I think my motives are pure!

No, you have every reason to try to cheat the middle aged who have spent a life time saving. Callow youth (everyone under 40) probably explains a lot of the cavalier attitude to inflation that has been expressed. :-)

"you have every reason to try to cheat the middle aged who have spent a life time saving"

OK, but let's not assume that inflation does this. It is relatively poor savers who make disproportionately large use of nominal savings products like bank accounts - eg see here: http://www.census.gov/people/wealth/ Keynes' remarks about the "euthanasia of the rentier", dating back to a time when rich British tended to hold wealth for generations in gilts, have lately been used carelessly to justify the persecution of innocent people who are in a poor position to fight back. Meanwhile from central banks' own research, we know that QE, which may lead to inflation if it proves troublesome to reverse, has tended to benefit the really, really rich, who tend to own more risky investments including real assets such as stocks, property and private equity.

Thanks for trying to shed some light, Carola, but I am afraid I find that your adviser's research rather misleading on the issue that we are discussing. Almost any economic stimulus should decrease income inequality; indeed, given the number and marginal employment status of the relatively poor, it probably would not stimulate economic activity if it did not. And via the income MPC, I would expect any stimulus to decrease consumption inequality. But "rich" is surely more about wealth, and the question here should be whether monetary easing, especially QE, is increasing wealth inequality, and the evidence from central banks is that it is: http://www.bbc.co.uk/news/business-19356665

I would not expect the kind of wealth increase - ie mainly affecting illiquid risky assets, like London residential property - caused by QE to show up much in the consumption of the highest earners (especially if you exclude the top 1%), and of course even the poorest savers likely to be disproportionately holding deposits are probably not among the very poorest by income, so I would not expect the wealth effect from QE to do much to offset the income stimulus effect on income and consumption inequality.

That said, I certainly have sympathy for many seniors. It's hard at that age to put a lot in the stock market, unless you really have a lot.

What's worse, but you don't hear about, from what I've been able to ascertain, most traditional pensions from employers are not indexed to inflation! Amazing! So, if a pension is a big part of a seniors income, inflation can just be savage, and so of course they love zero inflation, if not deflation!

So, of course the government should regulate here, and typically require that pensions be inflation indexed. But in general there should not be too much reliance on private pensions as opposed to government, i.e. Social Security, as how many companies can you really be very sure will be around 30, 40, 50 years in the future. And this is something you really want to be sure about, not just for you, but for your children you could be a burden to.

Absalom and others have hit the nail on the head wheras Frances Coppola talks out of the back of her head She has no understanding whatsoever of how hard the elderly find coping with anything more than savings in a bank or B Soc She refuses to face the fact millions of seniors have lost 70% of their incomes which is massively more than any other sector of society She refuses to accept that millions had their fingers burnt even with so called safe investments plus just as many have seen pension funds filched by company takeovers Millions more have pension pots not worth the paper they are written on The elderly who have saved out of TAXED income all their lives deserve a darn site more respect and consideration both from those on this forum and particularily the Government

It quite simply is not possible to live on £110 a week state pension in the South

Its not even possible to live on Pension Credit of £142

Just as many like me only get £66 a week and thus our savings interest is truly vital Just over a year ago savings rates before Funding for Lending trashed everything were a tolerable 3 or 4% now they are 1% and falling I have a mixed portfolio but its value now is half what it was in 2009 as are the dividendsI have a life interest but I cant touch the capitol hence my income has plummeted 70% and I cannot pay the most basic bills

Where now is Carneys "immense sympathy"Sorry but theres absolutely nothing that can justify what Funding for Lending has done to savers incomes or indeed the increase in houise prices its creating

Osbourne and his puppet Carneyu are wrong wrong wrong and Canada is proving I am correct

They were sure glad to be rid of that smug smirking face who learnt economics in the gutter not in the real world